Personal Savings: How to Start

If you are like most people (most of you are), you find it hard to put money away in savings with any regularity, and even if you do put money away, you have trouble keeping it there and building it to any sizeable amount. Today, we will explore ways of building your savings and protecting yourself from yourself.

When we speak of savings, we must keep in mind all of the reasons that we save money. We might put money aside for emergencies, or we might be saving for a major purchase (i.e. car, boat, house), or perhaps for major needs such as college for the kids or our own retirements. In todays issue, we will speak mostly to saving money for emergencies and major purchases. College and retirement savings encompass many methods, uses, and tax consequences, so these will be dealt with individually in future articles.

Emergency fund savings seems to be the hardest for people to latch onto, because it is so hard to define a true emergency versus an inconvenience. In addition, if you carry debt, it can be all too tempting to just pay down credit cards, and use the credit cards when an emergency happens. I know. I've been there. However, a cash emergency fund is the way to go. If you have a credit card spending problem, raiding your savings account is not the way to fix it. We'll deal with credit card misuse and traps in a future article as well.

PAY YOURSELF FIRST!

The first rule in establishing personal savings is to PAY YOURSELF FIRST! I know, I know. You have been trying to pay all of your bills, and you are afraid that if you pay yourself first, you won't have enough money for the bills. Trust me. You can make this work, but ONLY if you pay yourself first. The government may not do a lot of things well, but even they know that if you pay them first, your taxes will get paid. Follow their lead here.

Your payroll check includes deductions for Income taxes (state and federal), FICA/MEDC for retirement (as if!) and future medical care, SDI (State Disability Insurance), and may also include withdrawals/contributions to retirement plans, 401(k), and other withdrawals that you have authorized. I will ask you to either authorize a 5% to 10% automatic deposit to your savings account by your employer, or implore you to make this deposit to savings yourself, when you deposit your check each pay period. Once you make this deposit, forget about touching that money.

Now, if you are used to living paycheck-to-paycheck, this may be difficult at first. You may find yourself running short on money near the end of your pay period. This may mean going to a couple less meals out or see fewer movies, or perhaps making some dietary adjustments. This is a good thing. You need to reign in your expenses, and a pay reduction is good medicine for that.

Where I find great success in this is when a client receives a promotion or changes jobs into a higher salary. If this happens to you, take at least one-half of the increase, and add it to what you are saving. If possible, take all of the increase. If you are just starting out, graduating college, or getting a first job, it may be easier to put money away, because you aren't used to having much anyway.

Your emergency fund should build to six months' expenses over time. (Some planners recommend six months' income, but I find that this sets the bar too high for most people.) This assumes that you are able to maximize your contributions and not touch the money. This can be hard when life throws you a curve ball, but if you can increase your emergency fund by one month's expenses every year, you will improve your financial security over time.

TAX WITHHOLDING AND REFUNDS

If you are receiving a large tax refund every year, I recommend that you submit a new W-4 to your employer that will eliminate this refund. This will result in a bigger paycheck, and I recommend that you take this increase, and add it to the 5% to 10% that you are already saving. It amazes me that people will struggle all year with credit card debt, and then use their tax refund to pay off the credit card. The IRS paid you 0% interest on that money, while you paid your bank up to 20% or more! Save the interest, and just take the money when you earn it.

Now that you have a savings account for emergencies, let's talk about major purchases. Since we live in an era of (usually) easy credit, many fall into the temptation to purchase expensive items that they cannot afford. I know that you would never do this, but I have a theory on how best to prove to yourself (risk-free) that you can afford something, while saving you a lot of money in the meantime.

BUYING YOUR FIRST HOME

If you want to buy a house, I make this recommendation (especially if it is your first house): Don't buy it yet. This is my recommendation in most markets, but in the present housing market, you have two years before things are really going to get back to normal, as short sales and foreclosures are going to depress markets for at least that long. Banks are starting to recover from the sub-prime fallout, but I think that more writedowns and closures are still possible.

What I would recommend instead is to find a house that you would really like to buy, and that you think you can afford. Take the sales price into account, and see a mortgage broker to find out what kind of terms you could get for a loan in your current situation (income, credit score, and other factors). Calculate taxes and insurance based on the listed price. Once you compute the total house payment (PITI), get an estimate for the upkeep costs on the property. Figure 10% of your monthly loan payment for maintenance, find out the cost to do yard maintenance if you would hire that done, and get an estimate for the utilities (gas, elec, water, trash, pest control). Add all of these numbers together. This becomes 'X'.

Take 'X' and subtract from that number the amounts you now pay for rent and utilities each month. This new number is 'Y'. For the next two years, I want you to deposit 'Y' into a separate savings account on the 1st of each month. If things happen, and you can't pay on time, and you happen to pay yourself after the 15th of the month, I want you to add 5% of 'X' to your savings deposit. If you can maintain this payment for two years, you have proven that you can afford the house, and you should have a sizeable kitty to use for a down payment, closing costs, and reserves. You may also find that you now qualify for a better interest rate, because your financial situation has improved over time.

CAR PURCHASE STRATEGY

If you want to purchase a car, I recommend a similar approach. Find out the cost to purchase the car you would like to have, determine the payments, insurance, registration, and maintenance costs of that car. Then, take the money that you would use for a down payment, and purchase a passable, but dependable, car for that cash. Each month, pay into a separate savings account the amount of costs that you would have had, if you had purchased the car you had in mind.

If the car you bought requires any excessive maintenance (repairs over $200), you may take the money from the savings account for those repairs. If you get an exceptionally large estimate, you can use the accumulated savings to buy a new car. If you only put $400 per month into the account, you will have almost $5,000 by the end of the first year. If your POS (lousy) car lasts two years, you should have about $10,000 available, less any repair costs withdrawn.

When the car dies, spend up to the total amount of cash you have saved on a replacement vehicle. Be sure to update the amounts you are saving to take into account the inflated costs at this point, and continue to place this new amount into your savings account each month. If you do this properly, in a few years, you will be able to afford almost any car you want for cash. Keep up this habit, and you will save yourself tens of thousands of dollars in interest payments over your lifetime.

If you want to purchase a boat or jet skis or any other non-essential item, do the same thing as with a car, but spend two years saving money towards the purchase. You might change your mind about buying the item, in which case you can apply the money to any other purpose, or you may be able to pay cash or a significant down payment when you are ready to buy.

These are just a few ways that you can save money. Build your emergency fund, plan ahead for a house, pay cash for your cars, and delay your gratification for other major purchases, and you will keep yourself from biting off more than you can chew financially. You may also find that this sort of discipline pays a benefit to you in that you will be less likely to act on a whim that can spell financial disaster for you and your family. If something really bad happened, but you were saving money for a car or house, you will be grateful that you had the extra cash on hand. Having extra money can also enable you to take advantage of opportunities as well.

I welcome your comments, suggestions, and stories. Blog to you soon!

Investing: Dollar Cost Averaging

Happy New Week!

Many people often ask me if I have any stock tips. Usually, they hope for some kind of inside information, as if I had a clue! My basic recommendation is that if you have less than $100,000 liquid, investible cash, don't worry about buying ANY individual stocks. Stick to a mutual fund with an above-average management team. The cost benefits and professional management outweigh the risk involved in trying to make a killing on an inside tip. We will talk about Mutual Funds in more detail in another post, but today I want to talk about a way to maximize returns through systematic investing. We are talking about Dollar Cost Averaging.

Dollar Cost Averaging (DCA) simply means that we will invest a fixed amount of money, on a regular basis, without regard to market conditions. In an unpredictable market, DCA helps to minimize market swings, removes some of the investment risk, and allows for continuous market investment, regardless of market conditions.

Two methods of Dollar Cost Averaging are prominent. Lump Sum Allocation and Regular Contributions.

If you have a lump sum of money to invest, whether from an inheritance, lawsuit proceeds, or transfer from another investment (i.e. house sale), it is probably not a good idea to just throw all of this money into the market at once. If you pick a day that the market has peaked, you could see your investment diminish quickly in the short-term. Of course, you might get lucky, and pick the low point of the market, but I've never been that lucky.

With a Lump Sum, you would place the money into an investment account, but you would allocate that money for investment over a period of time. Let's say you wanted to allocate over one year. You would place the bulk of the money into a low-risk fund (i.e. Money Market, Bond Fund), and allocate the rest of it to your other investments (i.e. Diversified Mutual Fund). Each month, or even weekly if allowed, you would transfer a portion (e.g. 1/12, 1/52, etc.) from the low-risk investment to the diversified portfolio. A regular contribution would mean that you are investing money on a fixed schedule, such as weekly or monthly.

The goal of either method is simple. Each time you transfer or make an investment, you buy the maximum number of shares or investment units that you can for the amount invested. This ensures that you buy less shares when the price is high, and more shares when the price is low. Let's break this down with an example. Let's assume that you invest $200 per month for six months as follows:

As you can see, the average share price during the year was $11.72, however your average cost per share is only $10.98. Now, it doesn't always work this way, but more often than not, you will have a lower average cost per share, just by virtue of buying less shares at a high price and more shares at a low price.

This can be illustrated in other ways as well. Let's say that you own 2,000 shares of an issue that is worth $20 per share on January 1. That is $40,000 in your portfolio. If the market drops to $12.50 per share on February 15, you have lost almost 40% of your holdings in one fell swoop. Your first instinct would probably be to sell. That is almost always the wrong choice. You would just lock-in your loss at that point.

If you have faith in the company, your better decision would be to continue buying shares on the way back up. If you had been investing $500 per month previously, you should continue to invest the same amount. If you bought 40 shares at $12.50 the first month, and then continued to buy each month, you would be back to even, on a price-per-share basis, much earlier than if you just let your investment sit, and waited for the market. By the time the market fully recovered to $20 per share, you would be showing a gain, due to the many shares that you purchased when the price was down.

The nicest feature of Dollar Cost Averaging is the fact that you never have to worry about trying to time the market. Many people sit on the sidelines waiting for a price to fall, only to miss the opportunity to ride the price up. With Dollar Cost Averaging, you invest systematically, and you buy more shares at lower prices, which will make your average price per share lower.

I welcome your questions and comments. Invest regularly and wisely. Good luck!

Business Depreciation

Since we are now nearing our annual day of reckoning (aka Income Tax Filing Day), it only seems appropriate that I take on a tax issue on which I often receive questions. Today, we will be discussing Business Depreciation, which is a tax mechanism that offers various ways for a business to apply the cost of capital assets against the earnings of that business.

This edition of "Personal Finance for Real People" sponsored by:

First things first, let's get the legal stuff out of the way. I am not a Certified Public Accountant. Therefore, I implore you to seek the services of a CPA or Enrolled Agent prior to making any decisions based on what you are about to read here. I make no guarantee, warranty, or representation for the information that appears herein. I do believe that everything here is accurate, but please seek the advice of a qualified, licensed professional before acting on this information. I provide this information only as a general guide to depreciation. This is not a complete detail of all the ways that depreciation applies, so please do not regard it as the end-all information-wise.

What is Depreciation (and for that matter, Amortization, Accretion, etc.)? According to Wikipedia, "depreciation is a term used to describe any method of attributing the historical or purchase cost of an asset, across its useful life...." Amortization relates to the depreciation of intangible assets, such as Goodwill, Patents, and the like. Accretion generally relates to changes in bond or stock prices that occur as the result of a particular transaction. This post will focus on depreciation.

Property that can be depreciated includes leasehold improvements to your business establishment, business equipment and machinery, vehicles and boats, structures owned by your business (i.e. buildings), and other fixed assets. You may not depreciate land, inventory, or equipment that is leased (i.e. rented), unless the equipment is intended to be purchased via lease and buyout. Capital assets purchased and disposed in the same tax year are also not subject to depreciation.

The US Internal Revenue Service allows several methods for computing depreciation. A complete source of information regarding depreciation may be found in IRS Publication 946. Step one is to determine the useful life of the asset. Each asset to be depreciated must have a useful life of more than one year. If not, you would simply expense the item and be done with it.

For those items that have a calculable useful life of more than one year, these would generally be depreciated, unless they are excepted items as mentioned above. There are other exceptions, so be sure to review IRS Publications and speak to your tax professional for advice specific to your situation.

Over the life of the asset, you will need to know three basic pieces of information: The date the item was placed in service, the cost basis of the item, and the estimated useful life of the item. From this information, you can calculate depreciation using one of several methods, including Straight Line, MACRS (General or Adjusted Depreciation Systems), Income Forecast, and Units of Production. It is not only possible, but probable that you will employ different methods of depreciation for your fixed assets (i.e. Some could be subject to MACRS, while some are Straight-Line).

For tax purposes, in addition to the depreciation methods listed above, under Section 179 of the Internal Revenue code, a business may write-off up to $125,000 under this section (for 2007), with some exceptions. If the business is located in an Enterprise Zone, this deduction may be increased, and some property is only partially eligible for Section 179 treatment (such as an SUV).

Depending on the type of property, the recovery period may be as short as three to as long as 25 years, with real property recovery periods being 27.5 or 39 years. Some property can be lumped together with similar property, with only the lump sums reported to the IRS each year, but other types of property must be listed (itemized) on your tax forms. Examples of listed property include passenger automobiles, specified commercial vehicles (including aircraft), computers and peripherals, and certain other property.

It is important to keep accurate records of the business use of all property, but especially with respect to vehicles and business property that could also be used for non-business purposes, such as a laptop computer in an employee's possession or a cell phone intended for business use.

If your business has capital assets, be sure to treat them properly with respect to the IRS' rules for Depreciation and Amortization. If you have questions about the proper treatment of assets on your books as well as on your tax return, be sure to consult a qualified, licensed tax professional in your area. If you prepare your own taxes, using TurboTax or another program, be sure to carefully follow the instructions included with the program, and carefully enter the information for each asset.

That's all for this week. Happy filing!

First-Time Credit

People often ask me, "Randall, I don't know how to get started with credit. I know it causes problems for most people, but in this society, you have to have credit to exist. No one will issue me any kind of credit card. How do I get started?" Many people also ask me about how to re-establish credit, after they have already mucked it up before.

First of all, I caution everyone to be careful with credit. This is one of those, "Do as I say, and not as I do" kind of propositions, because I have had credit issues in my life at various times also. I will tell you how to go about setting-up stellar credit for the first time (or the next time), so that you can establish or re-establish a decent credit rating.

This article will focus on the personal side of credit, which I suggest you fix before you get to the business side of credit, which I will discuss in a future article (or many). Credit issues can get complex, and this blog will deal with a lot of credit issues, including setting up personal or business credit, managing and maximizing your credit score, repairing credit, protecting your identity, and exercising your legal rights as a consumer. This posting focuses on an easy way to establish or re-establish your credit. Ready? Here we go!

Step One: Find $500 to $1,000. I know, you don't have that much money. Everyone tells me that.

Rule #1: If you can't save money, you have no business borrowing money! Remember this, because it is the theme for every credit-related issue I will discuss from now until I stop breathing (or blogging, whichever comes first).

If you don't have the cash, open a savings account, and put 10% of your paycheck (or more) into it every payday. Do this before you pay any other expense, including your rent. If you pay your expenses first, you will never be able to save any money. You might question me on this, but you have always paid your expenses first, and you don't have any money, right? Trust me, I know what I am saying. You will automatically adjust your budget, so that you don't starve. If you lose some weight, you will be healthier anyway.

Once you have accumulated $500 to $1,000 cash in your savings account (I highly recommend $1,000 or more), you will set-up a meeting with the New Accounts Officer at your bank. I always recommend getting to know the manager, so if you can get your appointment with him/her, even better. At this meeting, you will explain to the officer that you have been consistently putting money into your savings account for the past (however many) months. You are happy that you have been able to save this money, but you need to access some of it, but you don't want to take it from savings. Tell them that you would like to borrow against your account on a 12-month basis. You would like to borrow $1,000 of the money you have in the account.

The officer should set you up with a Secured Loan against your Savings Account. You may have to relinquish your passbook, or they may just put a hold on $1,000 in funds. Since this is a Secured Account, your interest rate should be lower than a standard loan. Perhaps in the low double digits (i.e. 11.5%). Yes, you are paying interest to borrow your own money. You could pay a whole lot more for setting up your credit. Compare this to the hundreds of dollars you would spend in fees and interest opening up a new secured charge card or loan online. This is better, trust me!

You will take the $1,000 that you receive from the bank, and you will take it to a second bank. Note: Please deal with major banks, because they all report your loans to the Credit Reporting Agencies. At the second bank, you will deposit this money into a new savings account. About one week later, you will go back to the bank, and tell them the same story you told at the first bank about wanting to borrow against your savings. After they agree, take the $1,000 to a third bank, and repeat the process.

After the third bank gives you the $1,000, go back to the first bank, and open a checking account with the money. This should now be about two weeks since you opened the first credit line. The next week, pay $100 on each of the three loans. Two weeks later, pay another $100 on each of the three loans.

At this point, you have savings accounts (all encumbered) at three banks, which total $3,000. You have three credit lines, which now total $2,400 (plus a little bit of interest). You have $400 in a new checking account. Notice that if you add everything up, your net worth is still about $1,000.

Remember how you were saving money to build-up your initial savings. Now, instead of depositing this money into your savings account every week, you will use this money to pay your loans. Pay the loans down so that they are at $300 each by the end of six months. Pay $50 per month each from that point, until you can pay-off all three loans.

Yes, this process takes six months to one year. At the end of the process, you should now have three savings accounts with at least $1,000 in each. Hopefully, you have increased your income at work during this time through a promotion, raise, or job change as well. Wait 45 days after you pay-off all three accounts. Then, go back to each bank, and borrow the $1,000 again from each. Deposit this money into the first checking account. In two weeks, pay $250 against each loan. Two weeks later, pay another $150 against each loan.

Pay $100 per loan after this, until paid. Be sure that you keep each loan open a minimum of six months before you pay it off, or it won't help you as much.

It is now 18-24 months since you began the process. You have six trade lines of credit history, all for $1,000 or more, and all paid in full. Hopefully, you do not have any other debt. You also should have at least $4,000 to $6,000 in total savings (you didn't stop saving, did you?).

At this point (and you probably could have done it sooner), you should have no problem opening unsecured credit accounts with Visa, Mastercard, American Express, or anyone else you like. If you had bad credit, these new accounts should help make up for some of that.

This whole process probably did not cost you more than about $100 in interest payments, it caused you to save a few thousand dollars, which you had been unable or unwilling to do before, and it has helped you establish or re-establish a good credit rating. Hopefully, you have learned some discipline as well with regard to building savings and managing your expenses along the way.

By the way, be sure that you continue to deposit money into your first savings account during this process. Just because you are only paying $150 - $300 per month on the credit lines does not mean that you should stop putting the excess from your 10% paycheck contribution into savings. Even though the account is encumbered, you can still make deposits to it.

Look for future articles on credit repair, and read them before paying any money to a collection account or other aged balance that is negatively reporting on your credit report. Other credit-related articles on the way will be dealing with debt management, staying out of debt, proper uses of debt, and a whole slew of articles regarding business credit, mortgages, and investment financing. Stay tuned!

Have a great day!

About Me

Hello and Welcome:

My name is Randall Parker. If you just happened to find my blog by accident, you may wish to know a little bit about me. Well, here goes:

I was born at an early age and raised in Southern California. My parents were kind enough to enroll me in preschool when I was two, and they sprung for a parochial education for me through the eighth grade. Thanks to their efforts, I received a great education. By my own choosing, I attended public high school.

In high school, I was a lousy student my Freshman year, but I turned things around pretty well over the next three years. My major involvements included Junior Achievement and Future Business Leaders of America. I achieved good things in both organizations, most notably placing third in the nation in JA's VP/Finance Officer of the Year Competition in 1983. I also won two school Achievement Awards, as I was chosen the school's Top Business Student and Top Work Experience Student.

I attended El Camino College, where I was involved in Student Government and Phi Beta Lambda (college version of FBLA). Major achievements here included being elected Student Body President of the School, being chosen California State President of PBL, and placing fourth in the nation in Accounting I for PBL in 1985. I also represented ECC on the Los Angeles Collegiate Council for two years.

From about 1980 onward, I was involved in the Entertainment Industry. I got my start as a mobile disc jockey, and at various times also did live radio, syndicated radio, and nightclub DJ work. Eventually, I owned one of the top mobile DJ companies in the South Bay. I also began building nightclubs, selling pro audio, lighting, and video equipment, ran a record pool, and did some consulting work on the side. In 1988, I moved to Bakersfield.

Once arriving in Bakersfield, I eventually started a new mobile DJ company, continued consulting nightclubs while branching into consulting work for other industries, and sold pro audio and lighting equipment nationwide via mail order and two retail stores. By 1997, I'd had enough of the Entertainment business, and I decided to try something different.

In 1998, I obtained licenses to sell insurance and securities. Working in the financial services field was new to me, but I'd always had an affinity for money, so it felt natural. In short order, I rose to a leadership position in the company for which I worked, and I found that I was making good money on a part-time basis. This allowed me to go back to school to finish the degrees that I had started so long before.

I attended Cal-State University, Bakersfield, where I obtained two BSBA degrees. One in Finance (emphasis: Financial Planning) with an Economics minor, and the other in Sports Management with a Statistics minor. The Business School at CSUB chose me as the Top Sports Management Graduate for 2004. I also completed the Four-Year Honors Program and graduated Magna cum Laude.

The next year, I enrolled in the University of Southern California's MBA program, where I completed an MBA in General Management in two years. During my time at USC, the football program won a National Championship and only lost one game. Go Trojans, Fight On!

In 2003, one of my many business consulting clients hired me to travel to the Philippines in order to negotiate a government contract on their behalf. Now, two and one-half years and a few clients later, I live in the Philippines. I am now President of DJ Network, Inc., which operates a call center that markets various financial products to clients in the United States.

While I admit that this description is quite abridged, I hope that it serves as a worthy introduction. Many with whom I have worked and whom I've trained over the past ten years have offered much support to my endeavors, and have encouraged me to continue sharing the information and techniques that I have learned, regarding business and financial planning. This blog is one such method by which I hope to do just that.

Please continue to visit, as I will be making many postings and sharing much information here over the coming weeks, months, years, and if God permits, decades. I welcome you, and I hope that you will bookmark my site, patronize my sponsors, and sign-up for my RSS Feeds.

Welcome!

Hello World and Reader:

I have finally relented to pressure from family, friends, colleagues, and others, and I am making my vast body of knowledge available to the rest of the world.

First, allow me to welcome you to "Personal Finance for Real People." This blog will attempt to provide useful financial planning tips that almost anyone can employ immediately, in order to improve their financial future.

Some of the topics planned for discussion include:

1. Income Generation (Ways to increase income, reduce taxes, and supplement income)
2. Debt Management (Consolidation techniques, credit enhancement and repair, ways to avoid debt)
3. Personal Savings (Emergency Funds, Goal Setting, Priorities)
4. Long-Term Savings (College Funds, Retirement, Major Purchases)
5. Risk Management (Proper Insurance Protection, Scam Avoidance)
6. Estate Planning (Wealth Transfer, Minimization of Death Taxes, Probate)
7. Real Estate (Your First Home, Income Property, Commercial Investments)
8. Mortgages (Saving Money, Choosing the Right Mortgage)
9. Business Topics (Incorporation, Funding, Managing, Planning, Business Credit)
10. Other Topics (Chosen by Readers or Dictated by Current Events)

Of course, each of these subjects has sub-topics, and each sub-topic provides many areas for discussion. Over the next few weeks, I will be posting a large number of informational articles touching on these points. These articles will provide a starting point for discussion, and I want your comments, so please feel free to contribute.

Once I get the core topics posted on this blog, I plan to submit at least one weekly post that deals with current issues. As of this writing, the sub-prime dilemma has touched almost everyone in the world, either directly or indirectly. Many people wonder how to take advantage of the situation for their own planning, while some just wonder how to get back to zero. Topics such as these will be fodder for this blog.

My goal is to set this up as a resource that will provide ideas for you to improve your financial life for the long haul. Having said that, I must request some things from you. Your willingness to read and participate in this blog are subject to the following disclosures, acceptances, and restrictions:

Anything that I have written on this site is copyrighted by me, unless stated otherwise. Rights to my content are mine alone, but I will authorize limited usage of this information:

1. By currently-enrolled students at no charge, as long as they provide proper credit to me.
2. If a student posts their work online, they must include a link back to the source of the material in addition to giving proper credit.
3. Teachers must request permission to use specific materials before use (usually granted at no charge)
4. To those who request and pay for a license to use the materials.

Furthermore, you agree to indemnify and hold me harmless for any use of the information that you read here, as it is offered for entertainment purposes only, and carries no guarantee, warranty, or other representation.

Having said all of this, I hope that you will bookmark this page, subscribe to my RSS feeds, click on my sponsors' links, and enjoy this blogsite for years to come.

I sincerely thank you for your visit and your support!

Randall Parker, MBA